SRG - Seritage Growth Properties

[Candyman1]

Candyman,

Interesting point.   Do you know if the rent rate $psf or length of vacancy had the bigger affect on properties during the Mervyn's process?   

Spoke to my friend again and he said the drag was about $4 a sq foot. But keep in mind that Mervyn's went chapter 7 in the recession. So that was an issue too.

Thanks!  By 'drag of $4 psf' do you mean something leasing at $18 went to $14?   Did your friend mention what rates they were getting?

Yes, on the best locations they had expected $14 and got $10 on the lower quality ones they ended up with $6 rather than $10. Now every store was different, but this was his generalized memory. $4 makes a big difference in final valuation.

[koshigoe]

You are seriously going to throw Berkowitz as a reference at me? LOL. If you show that guy a dollar bill, he'd tell you its worth two dollars. Go through his letters and reasoning why SHLD was worth so much more. Made no sense at all. All of his reasonings were laughable but the best one was when he put a value on the SHLD pharmacies.

Again, we agree - I thought he was crazy and on tilt to sell SRG in the 30s and give a one sentence reasoning as to why in his letter. As well as to invest in SHLD.

Berkowitz wasn't a reference in my above post, simply that the words he spoke about SRG (and ended up not believing himself) still ring true.

Straw man aside, SRG has strong properties (fact) and is low cost provider compared to competition (fact). They've been operating in tough environment for over 3 years and operationally have done quite well.  And best is yet to come with large projects. Look at some of the IRRs on the residential deal at Redmond, on the resale of Tanforan, on JV of West Hartford and Santa Monica. Clear, conservative path to 3 bagger in 7-10 years => ~15% compounded.

[Shane]

Even comparing within a state makes no sense Candyman1.  It can be as specific as neighborhood or block.  Two retail locations can have substantially different rent profiles and be only blocks away from each other.  There isn't much logic in saying the supply in Florida will triple when a store services a few square miles.

Interesting ... so why did redevelopment deals and terms struggle in CA when Mervyn's took Chapter 7 with about 120 stores. I guess those stores don't cover a few square miles. =) I know someone that was involved in that situation. Yes, the store covers only a local area, but the tenants don't. And the tenants now will have three times the choices to pick where they will open their new stores. It is much easier to negotiate with landlords when you have 4 knocking on your door with a great location each than when you have one. And the landlords will all call on the same potential tenants at the same time.
[/quote]

The point I am trying to make is that the stores coming online following a SHLD bankruptcy are likely not great locations and may not even compete with the SRG properties at all.  It is my belief that physical retail will still exist in the future, but many sites are no longer viable because of driving distance/inconvenience to customer.  Therefore, location will matter more in the future than in the past.  I don't know anything about Mervyn's, but I would imagine if it went bankrupt during the recession there was an abundance of properties on the market and a derth of tenants.  Do you think it closely parallels the situation with SRG, all things considered?

[Candyman1]

Even comparing within a state makes no sense Candyman1.  It can be as specific as neighborhood or block.  Two retail locations can have substantially different rent profiles and be only blocks away from each other.  There isn't much logic in saying the supply in Florida will triple when a store services a few square miles.

Interesting ... so why did redevelopment deals and terms struggle in CA when Mervyn's took Chapter 7 with about 120 stores. I guess those stores don't cover a few square miles. =) I know someone that was involved in that situation. Yes, the store covers only a local area, but the tenants don't. And the tenants now will have three times the choices to pick where they will open their new stores. It is much easier to negotiate with landlords when you have 4 knocking on your door with a great location each than when you have one. And the landlords will all call on the same potential tenants at the same time.

The point I am trying to make is that the stores coming online following a SHLD bankruptcy are likely not great locations and may not even compete with the SRG properties at all.  It is my belief that physical retail will still exist in the future, but many sites are no longer viable because of driving distance/inconvenience to customer.  Therefore, location will matter more in the future than in the past.  I don't know anything about Mervyn's, but I would imagine if it went bankrupt during the recession there was an abundance of properties on the market and a derth of tenants.  Do you think it closely parallels the situation with SRG, all things considered?
[/quote]

I disagree on the current SHLD. They just sold and leased back one property for $32 million. The properties sold under the mezz loan piece are selling for an average of around $10 million.
Yeah Mervyn's had the additional problem of the recession. 

[koshigoe]

"In malls where leases were signed decades ago, Sears rents could be as low as $4 a square foot. New tenants in the same space could bring as much as six times that amount."

https://www.wsj.com/articles/sears-exit-would-leave-big-holes-in-malls-some-landlords-welcome-that-1539342000

I don't think we see this situation again. There's not another Sears going under with these kind of goofy low rents. And SRG owns the best and the most.

[Candyman1]

"In malls where leases were signed decades ago, Sears rents could be as low as $4 a square foot. New tenants in the same space could bring as much as six times that amount."

https://www.wsj.com/articles/sears-exit-would-leave-big-holes-in-malls-some-landlords-welcome-that-1539342000

I don't think we see this situation again. There's not another Sears going under with these kind of goofy low rents. And SRG owns the best and the most.

Average new lease for SRG $17.5 per sq foot. Average SPG base minimum rent (before CAM) $53 per sq foot. Btw. if you assume that the $17.5 is before CAM, well SPG's  is close to $70 a sq foot after cam. Are you still sure that SRG "owns the best and the most". The SPG numbers are US numbers.

[Candyman1]

Straw man aside, SRG has strong properties (fact) and is low cost provider compared to competition (fact). They've been operating in tough environment for over 3 years and operationally have done quite well.  And best is yet to come with large projects. Look at some of the IRRs on the residential deal at Redmond, on the resale of Tanforan, on JV of West Hartford and Santa Monica. Clear, conservative path to 3 bagger in 7-10 years => ~15% compounded.
[/quote]

... the next 3 years are going to be a lot more challenging than the past 3 years. And I am not referring to the rough retail environment, no this one is specific to SRG.

[koshigoe]

Straw man aside, SRG has strong properties (fact) and is low cost provider compared to competition (fact). They've been operating in tough environment for over 3 years and operationally have done quite well.  And best is yet to come with large projects. Look at some of the IRRs on the residential deal at Redmond, on the resale of Tanforan, on JV of West Hartford and Santa Monica. Clear, conservative path to 3 bagger in 7-10 years => ~15% compounded.

... the next 3 years are going to be a lot more challenging than the past 3 years. And I am not referring to the rough retail environment, no this one is specific to SRG.
[/quote]

how will it be more difficult? in the last 3 years they've scaled a business from scratch to one of the leading retail developers in the US as far as development backlog.

1) scaled up from skeleton crew to 70+ full timers over last three years
2) instituted JV policies and asset sales as well as capital raising - now they're proven veterans with well placed and high quality partners and contacts
3) steady state leasing of around 500k sq ft per quarter at 4x multiples - all while scaling up!
4) ended talk of liquidity concerns, as by the time the 2B is due in 4.5 years, they will have several hundred million in rev.

so now with all that out of the way, you're saying just executing - now with laser like focus - will be tougher? signs point to no.

[koshigoe]

Average new lease for SRG $17.5 per sq foot. Average SPG base minimum rent (before CAM) $53 per sq foot. Btw. if you assume that the $17.5 is before CAM, well SPG's  is close to $70 a sq foot after cam. Are you still sure that SRG "owns the best and the most". The SPG numbers are US numbers.

uh, *** gross conceptual error alert ***.

form an earlier post:

All mall REITs cheat (industry practice) and don't include dept stores in their per foot rent averages. A holdover from the olden days and probably misleading at best, in the new de-malling, mixed use paradigm. For example, Macerich only reports per square foot for stores under 10k sq ft.

To be specific, from SPG 10k edit: pg 58

We include all company owned space except for mall anchors, mall majors, mall freestanding and mall outlots in the calculation. Base minimum rent per square foot is the average base minimum rent charge in effect for the reporting period for all tenants that would qualify to be included in ending occupancy.

Total Sales per Square Foot. Total sales include total reported retail tenant sales on a trailing 12‐month basis at owned GLA (for mall stores with less than 10,000 square feet) in the malls and The Mills and stores with less than 20,000 square feet in the Premium Outlets. Retail sales at owned GLA affect revenue and profitability levels because sales determine the amount of minimum rent that can be charged, the percentage rent realized, and the recoverable expenses (common area maintenance, real estate taxes, etc.) that tenants can afford to pay.

if anything, that comically inflated rent avg is warning signs for SPG and $$ signs for SRG. As Bezos says, your margin is my opportunity.

Are you one of the shorts I've been loaning shares to for the last two years?

[Candyman1]

Straw man aside, SRG has strong properties (fact) and is low cost provider compared to competition (fact). They've been operating in tough environment for over 3 years and operationally have done quite well.  And best is yet to come with large projects. Look at some of the IRRs on the residential deal at Redmond, on the resale of Tanforan, on JV of West Hartford and Santa Monica. Clear, conservative path to 3 bagger in 7-10 years => ~15% compounded.

... the next 3 years are going to be a lot more challenging than the past 3 years. And I am not referring to the rough retail environment, no this one is specific to SRG.

how will it be more difficult? in the last 3 years they've scaled a business from scratch to one of the leading retail developers in the US as far as development backlog.

1) scaled up from skeleton crew to 70+ full timers over last three years
2) instituted JV policies and asset sales as well as capital raising - now they're proven veterans with well placed and high quality partners and contacts
3) steady state leasing of around 500k sq ft per quarter at 4x multiples - all while scaling up!
4) ended talk of liquidity concerns, as by the time the 2B is due in 4.5 years, they will have several hundred million in rev.

so now with all that out of the way, you're saying just executing - now with laser like focus - will be tougher? signs point to no.
[/quote]

One of the four you got wrong. I'll let you figure out which one it is.